Dr. Raymond C. Rask

Steve Guttenberg writing for cnet.com recently wrote an article titled, “Sirius XM Sticks it to Subscribers” and in summary said:

How’s the Sirius XM satellite radio monopoly working out for subscribers? Not so well. Now that Sirius XM is the only game in town, it’s nudging up fees for subscribers. Nice!

The one and only satellite radio company’s boasts of its ever-increasing subscriber base are gone now, and the decline is significant. The number floating around the Internet is a loss of 400,000 subscribers. That still leaves 18.6 million, but there’s no way of knowing how many of that number are full-price-paying subscribers.

Could the subscriber losses be attributed to recent price hikes? The family plan package went from $6.99 to $8.99 a month and there’s a monthly $2.99 fee to receive Sirius XM stations over the Internet. That service was previously free. Back in March of last year I asked who was going to pay for the merger, and now we know. We’ve lost favorite channels and pay more for the service. So please explain why the merger was such a swell idea?

While I would agree with Steve Guttenberg accessment of the merger and its effects on subscrbers, the real problem for subscribers comes down to the ability of the merged entity to survive at all. Clearly, the days of both XM and Sirius spending money like there is no end are over. The days of entering into talent contracts that even would make television network executives think long and hard are over. The days of telling investors that satellite radio will put terrestrial radio out of business and the vast terrestrial radio audience is satellite radio’s to have are not only over, but were completely bogus from the beginning.

Satellite Radio may in fact be a flawed concept, at least as it is now operating in the United States. But that does not mean terrestrial has won the day, because frankly, terrestrial radio is in a steep decline of its own, mostly of its own making. Both satellite radio and terrestrial radio have a place in the market, but they are not the same beast. And, if the management team at XM Sirius Radio continues to operate the service, as if it is a multichannel terrestrial radio station, the service will end up being a very costly and failed experiement.

As a former terrestrial radio network engineering executive, a career satellite communications engineer and a former owner of multiple terrestrial radio stations, I have a number of practical comments about this subject, in addition to those provided above. For those interested, please read on….

1. Those in my household have subscriptions to both XM and Sirius Radio. I don’t know that I had a personal preference over the years, I enjoyed programming on both. But as an engineer, with an extensive background in audio and microwave engineering, I will say I preferred the audio and satellite signal performance of XM; I was really never very happy with the digital compression used by Sirius and the resulting lackluster audio quality.

2. As a terrestrial radio station owner, I did not feel I was competing with satellite radio. My stations’ programming were all about “local” and a good deal of time and money was invested in covering local/regional news and providing consistant quality programming. As a local broadcaster, my real competition was the local daily newspaper, its newsroom and advertising group.

3. But the above being said, I also knew very well that as far as music programming was concerned, my competition was the personal music player devices, and I would include satellite radio in that group. So, rather than spending time bashing satellite radio programming (as the NAB has done for years), much of which was nothing more than an automated MP3 player, I made sure my nitche (local programming) was the very best it could be.

4. The majority of market share decline of major and medium market terrestrial radio is not the direct result of satellite radio, MP3 players, 200 channels of cable TV or anything else, but instead rests squarely on the shoulders of the mega-corporate station owners, who have cut the local staff and news operations to the point that “local programming” has nothing to offer, and therefore listeners, more ofter than not, turn to their MP3 players and satellite radio in order to have other choices.

5. Satellite Radio: The dueling battles for the launch and survival of satellite radio is what drove both compaines (XM and Sirius) to do what they felt was best to create subscriber growth and ultimately survive. For those of us who have a pretty good understanding of what it costs to design, build, launch and operate a satellite system, including building spares and replacement spacecraft, it was fairly appearant from the beginning that it was unlikely two satellite radio operators could survive long term. And, it was very clear from the beginning that getting people to “pay” for radio was going to be a steep uphill task.

6. Like many other products available to consumers, there is a subjective “price” the market will bear, and XM and Sirius were all ready near that number before the merger. Now as a merged entity, they are not going to be able to cut their losses by raising the price. Raising their price, at least for now is going to drive away those subscribers who were already walking the line of whether the cost was worthwhile and/or will cause people with multiple subscriptions to reduce cost by cutting subscriptions.

7. Customer service at Sirius Radio was already weak, XM appeared better, but frankly neither was very good for an industry who was in a race for survival. One thing is for sure now, this is the wrong time for the management team to further reduce the quality of their customer and technical support teams.

In summary, it is clear the combined Sirius-XM operation needs to move aggressively to consolidate operations, get costs under control, determine what nitche they want to serve, then start investing the money saved in programming content and customer service, in order to turn around the subscriber defections and create long term growth.

My recommendations would be to:

1. Determine what programming is really going to sell itself; then work on developing that line-up.

2. Move to consolidate satellite operations onto one satellite system. For the sake of the long term stability of the company, to reduce technical-operational complexity and cost, and provide the best possible service to the subscribers, the XM satellite system is the best choice.

3. Figure out how to get the Sirius users moved to the XM satellite system with the least possible disruption, and put together some financing to assist users in this transition.

4. Get the new programming line-up on the XM system this fall, including premium content like Howard Stern. While Howard Stern is no fool, I have little doubt he would agree to a new much less expensive deal, as long as he could participate in the longer term upside. Cut all the junk programming and costs surrounding the Howard Stern program. Get Howard to do his show live five hours a day, 5 days a week, and repeat the show on one single channel the rest of the time.

5. Run the same programming on both satellite systems until March 2010 (allows people time to buy new hardware as Christmas gifts and birthdays, etc.). Allow Sirius subscribers to move to XM easily and very quickly. Shutdown the Sirius terrestrial repeaters at the end of 2009 to move people along, and shut down Sirius satellite operations on March 31, 2010. Allow only XM system users to access Internet programming at no cost, again prompting people to move to the XM system. Give people a financial incentive to keep ALL of their subscriptions active through December 31, 2010.

6. Decide whether Sirius-XM is going to operate from New York or Washington, DC, and start the full consolidation asap, and get it done by this fall.

7. Look at other high profit revenue streams that could be combined into the XM digital transmission system.

8. Look to leverage the old Sirius satellite system by either selling it to a data provider, or by creating a partnership with a data-broadcasting partner to use it as a mobile/portable data network. There are a number of potential applications that could generate revenue for this extra system. If, as it turns out, these other applications are not financially productive and/or the Sirius satellite satellite system is in need of near term satellite replacements, then just shut it down and move on.

Finally, Sirius-XM will not survive even in a consolidated mode if there is not an effective, productive and focused operating-management team. The operating-management team needs to grow the business and make “long term” decisions. The public-company team needs to raise capital for the new group and keep their hands off the operation. There is no question Sirius XM is in trouble and may even be on life support at this point, but a dedicated management team with a long term view has a reasonable probability of making Sirius XM a real busienss, as long as there is focus on the operating company, and not creating public company “transactions.” And, even if the management team can stop the defections and create subscriber growth, it is going to be touch and go for some time to come, so survival is really going to depend on good-quick decisions by an effective “small” management team, and focus, focus, focus.